The MI US Select fund, within MPS, is a segregated mandate with an approximate 55/45 split between JPMorgan US Equity Income and Baillie Gifford American Growth. These mandates are not the exclusive US equity exposure in the portfolio, an allocation is also reserved for a passive holding, providing market exposure at extremely attractive rates. The JPM US Equity Income and Baillie Gifford management teams have been selected due to their excellence within their respective areas of the market, namely Value and Growth.
Value, as a strategy, is one we would associate with lower prices paid relative to the current level of earnings. The market might apply this discount for many reasons but will often be down to low expectations for earnings growth or a higher level of volatility around the earnings stream. Indeed, economically sensitive business such as banks, industrial and commodity businesses, will often find themselves lumped into the Value category for exactly these reasons. Upside rewards are on offer here, if stocks enjoy both earnings growth but also a positive rerating for those earnings. Conversely, and though no cycle is identical, Value is likely to struggle in a recessionary environment as the double whammy of an earnings collapse and a lower rating paid for those earnings can mean dramatic falls in share prices.
JPMorgan are currently widely invested in banks and energy where, provided the US avoids a recession, and the oil price remains reasonable firm, the two sectors should deliver a decent earnings performance and pay healthy dividends.
Growth as a style, will typically see managers buy business trading at higher ratings. This is because the market either has high confidence in a modest but consistent level of revenue growth, or because there is the potential for supernormal growth. A consumer staple business such as P&G would fall into the former camp whilst Netflix would fall into the latter.
Baillie Gifford are fully immersed in the US Technological and Biotechnological innovators that are so changing the landscape regarding consumer, business and medical trends.
This style has been particular in favour over recent years as concerns about banking fragility and high optimism about Technological disruption have dominated the investment narrative.
Which style will win out? This is a hard one to call, however, unlike many other investment houses we are unwilling to bet against Tech given the high valuations. Such a dogmatic stance will have cost clients dear. And, who knows, perhaps Amazon will be the only listed business left in the world in 10 years.
Our strategy is to split evenly between the two styles, with a little less in Baillie Gifford given their starker style positioning, letting stock selection do the talking. On that basis, and aided by the highly competitive charging structure, we are delighted to see the MI Select US fund outperforming its target index since initiation.
Ben Gutteridge, CFA
Head of Fund Research
Past performance is not a guide to future performance.
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The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
The value of investments can fall and you may get back less than you invested.
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The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.